What are LP tokens?
On automated market maker (AMM) platforms like FuseFi's decentralized exchange (DEX), you remain in control of your assets by receiving LP tokens in return for providing two tokens in liquidity to the liquidity pool, which is managed by code and not by human operation. LP tokens represent a crypto liquidity providerโ€™s share of a pool, which remains at their control at all times.
For example, if you deposit $10 USD worth of two assets (e.g. $5 in FUSE and $5 in USDC) to a FuseFi DEX pool that has a total worth of $100, you would receive 10% of that poolโ€™s LP tokens. You receive 10% of the LP tokens because you own 10% of the crypto liquidity pool. The LP tokens become your claim to your share of the poolโ€™s assets and rewards to its liquidity providers. Holding these LP tokens gives you total control over when you withdraw your share of the pool without interference from anyone โ€” even the FuseFi platform. And since LP tokens are ERC-20 tokens, they can be transferred, exchanged, and even staked on other protocols.
Please note, however, that the proportion between the two tokens that you withdraw from the pool using your LP tokens may differ (sometimes substantially) from the initial 50/50 one because the price changes. This may even result in the withdrawn amount being lower than the deposited one in US dollar terms. This is called impermanent loss risk and you should monitor the price dynamics to minimize it.
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